Certified Residential Appraiser Practice Exam

FHA loans are primarily characterized as?

1. Guaranteed by government.

2. Mortgages that are insured.

3. Available only for first-time buyers.

4. Require high down payments.

The correct answer is: Mortgages that are insured.

FHA loans are primarily characterized as mortgages that are insured. This insurance is provided by the Federal Housing Administration (FHA), which protects lenders against losses if a borrower defaults on the loan. The insurance allows lenders to offer more favorable terms, such as lower down payment requirements and potentially lower interest rates, making homeownership more accessible to a wider range of borrowers, including those with lower credit scores. The FHA’s insurance is a key aspect that distinguishes these loans from other types of financing, as it mitigates risk for lenders. This characteristic plays a significant role in the popularity of FHA loans among buyers, particularly first-time homeowners or those with limited financial resources. In contrast, FHA loans are not guaranteed by the government; rather, they are insured, which means they remain a loan obligation rather than a guarantee of repayment by the government. While these loans can be available to first-time buyers, they are not exclusively limited to them, as subsequent homebuyers can also utilize FHA loans. Lastly, FHA loans are known for their low down payment requirements, often as low as 3.5%, which is contrary to the notion of requiring high down payments.